Embed Size (px)
Citation preview
NATIONAL CONCLAVE 2012
On
Redefining Management Practices:
A Perspective in Changing Business
Scenario
Research Paper
On
Forensic Accounting – Another feather in the Hat of
AccountingBy
DR. AVINASH PESHWE,ASSOCIATE PROFESSOR, DEPT. OF COMMERCE,
NETAJI SUBHASH CHANDRA BOSE COLLEGE, NANDED
Email-Id: [email protected], Mobile: 09822060012
and
Mr. MANOJ KUMAR GELDAAssociate Profesor, Dept. of Commerce and Business Management,
Nishitha Degree & PG College, Nizamabad – A.PEmail-Id: [email protected], [email protected], Mobile: 9492009452
Abstract:
Forensic accounting has come into limelight due to rapid increase in financial frauds and
white-collar crimes. But, it is a largely untrodden area in India. The integration of accounting,
auditing and investigative skills creates the specialty known as forensic accounting. The
opportunities for the forensic accountants are growing fast; They are being engaged in public
practice and are being employed by insurance companies, banks, police forces, government
agencies, etc.
Maurice E. Peloubet coined the term ‘Forensic Accounting’ in 1946. Kautilya was the
first economist to articulate the need of forensic accountants. the growing arena of business and
surging number of white-collar crimes that have led to the development of Forensic Accounting.
Forensic Accounting borrows knowledge from Accounting, Finance, Law, Computerisation,
Ethics, Criminology, etc. While Forensic Accounting developed as early as 1995 in USA, it put
its first step in India just few years back. It is desired that in near future an accounting standard
will be formulated on Forensic Accounting. This article aims at throwing light on Forensic
Accounting. It encompasses the terminology, a brief note on its origin, role of Forensic
Accountants, the techniques involved in their work and the present scenario of Forensic
Accounting in India.
Nearly 40 percent of the top 100 American accounting firms are expanding their forensics and
fraud services, according to Accounting Today. If this data is of some sense to Indian scenario
then the day is not far away when forensic practice will contribute maximum to the total revenue
of the Indian CA firm. Far from the humdrum stereotypic accountant your mind might have
initially conjured, the forensic accounting professional is more of a private investigator with a
financial sixth sense than the bookkeeper with a green eyeshade.
1. Introduction:
Until recently, detecting fraud or whitecollar crime was thought to be part of The
conventional accounting function. Fraud was something the internal or external auditors were
supposed to guard against through their periodic audits. Now, we as accountants know that
auditors can only check for the compliance of a company’s books to generally accepted
accounting principles, auditing standards, and company policies. Thus, a new category of
accounting was needed to detect the fraud in companies that suspected fraudulent transactions.
This area of accounting is known as ‘forensic accounting’.
Necessity is the mother of all inventions. Yes, it is the growing arena of business and surging
number of white-collar crimes that have paved the way for the development of Forensic
Accounting. According to AICPA, “Forensic Accounting is the application of accounting
principles, theories and discipline to facts or hypothesis at issues in a legal dispute and
encompasses every branch of accounting knowledge.” According to The Accountant’s
Handbook on Fraud and Commercial Crime, Forensic Accounting is the application of
financial skills and an investigative mentality to unresolved issues, conducted within the
context of the rules of evidence. Forensic Accounting borrows knowledge from Accounting,
Finance, Law, Computerisation, Ethics, Criminology, etc. Investigation plays a pivotal role in
Forensic Accounting. It is the flavour of investigation that demarcates it from the conventional
accounting practices. In wide sense, it can be identified as integrity of accounting, auditing and
investigative skills to secure a particular result.
Forensic accounting is the application of a specialized knowledge and specific skills to stumble
upon the evidence of economic transactions. The job demands reporting, where the
accountability of the fraud is established and the report is considered as evidence in the court of
law or in the administrative proceeding.
In addition to the specialized knowledge about the techniques of finding out the frauds one needs
patience and analytical mindset. One has to look beyond the numbers and grasp the substance of
the situation. It is basically the work of the intelligent accountants. He needs to question
seemingly benign document and look for inconsistencies. He searches for evidence of criminal
conduct or assists in the determination of, or rebuttal of, claimed damages.
He requires the ability to think. Far from being an ability that is specific to success in any
particular field, developing the ability to think enhances a person’s chances of success in life,
thus increasing a person’s worth in today’s society.
Sherlock Holmes was probably the most famous practitioner being the Forensic Chemist. But
the Kautilya was the first economist who openly recognized the need of the forensic
accountants. He mentioned forty ways of embezzlement centuries ago. The Opportunities for the
Forensic Accountants are growing at the rapid speed. Collapse of Enron and WTC twin towers
have blessed the American Forensic Accountants with the opportunities.
In India the formation of Serious Fraud Investigation Office is the landmark creation for the
Forensic Accountants. Growing cyber crimes, failure of regulators to track the security scams,
series of co-operative banks bursting - all are pinpointing the need of forensic accounting,
irrespective of whether we understand the need or not.
In the Indian context the Forensic Accountants are the most required in the wake of the growing
frauds. The law enforcement officers are the experts of analyzing the fingerprints and the
Narcotics but what about the digital evidence analysis. Very few know about it.
It’s a thrill of hunt. Maurice E. Peloubet who coined the term Forensic Accountant in 1946
said that the preparation of financial statements has some but not all of the characteristics
of forensic accounting.
This statement is enough for the chartered accountants in India to foray in this field. It is new
child on the block. Both CBI and CID cops do the forensic accounting work. Until recently there
was no separate community in India. But now movement of India forensic community is
gathering the pace.
2. Objectives :-
1. To know the use of Forensic Accounting.
2. To know that, how to control Financial frauds in companies
3. Hypothesis :-
Forensic Accounting method is the effective tool to control the financial frauds,
corruption, misappropriation and use of e-Accounting and taxation in the corporate world.
4. Areas covered under Forensic Accounting:
Certain engagement related to civil disputes viz. disagreements related to company
acquisitions like business valuation, calculating and quantifying losses and economic
damages through breach contracts etc.
Shareholders and partnership disputes involving detailed analysis of numerous years
accounting records to quantify the issues in dispute.
Cyber crime like credit card frauds, ATM card frauds, cyber extortion, cyber stalking,
phishing i.e sending unsolicited e-mails & Collection of sensitive information by simple
techniques.
Forensic accounting also deals with areas of professional negligence claims, involving
assessment and reporting on work of other professionals. This involves investigating
whether breach of “generally agreed accounting and/or auditing principles” has occurred.
Engagement involving criminal matters, involving assessment of accounting systems and
accounts presentation , where forensic accountants are hired by the law of enforcement
agencies.
Business investigations involving fund tracing, asset identifications and recovery,
forensic intelligence gathering and due diligence reviews.
Employee fraud investigations involving procedures to determine existence, nature and
extent of fraud and may involve identification of the clauses etc.
Business Economic losses viz. contract disputes trademark and patent infringements,
losses arising from breach of non-compete clauses etc.
Cases involving medical insurance claims, medical malpractices resulting in economic
losses.
Mediation arbitration in alternative dispute resolution mechanisms due to familiarity of
forensic accountants with legal issues and procedures, helping individuals and businesses
resolve disputes with minimum disruption and loss of time.
5. Terminologies used pertaining to forensic accounting:
1. Forensic Investigation:
This refers to using specialized investigative skills to undertake inquiry in such a
manner that outcome hall have an application in court of law. Forensic investigation may
be grounded in areas like accounting, medicine or engineering.
2. Forensic Audit:
This refers to investigation of a fraud or presumptive fraud with a view to
gathering evidence that could be presented in courts of law. It is essentially a blend of
propriety, investigative regularity, and financial audits. The objective is to ascertain
whether true business value has been reflected in the financial statement and during the
course of examination to find whether any fraud has taken place.
6. Detection techniques used in forensic accounting
A. CPA (Critical Point Auditing)
Scrutiny for CPA may involve use of
a. Trend Analysis
b. Checking unusual debits/credits in the accounts
c. Discrepancies in receivable / payable / inventory balances evidenced from
financial records corresponding subsidiary books.
d. False credits to boost sales with corresponding debits to non-existent/dummy
personal accounts.
B. PA (Propriety Audit)
1. PA is conducting by supreme audit government accounts prepared are in order,
in terms of approvals and sanctions of expenditures incurred, whether the
expenditure incurred was need-based and that the revenues have been realized
in time and properly credited to government accounts.
2. The analogy of “value for money audit” is applied to forensic audits whereby `
financials frauds are unearthed saving wasteful and unwarranted
expenditures.
7. Role of a Forensic Accountant
“Auditor should be watchdog and not be the bloodhound”. It’s a good quote that every
auditor should know. This quote makes the definition of Forensic accountants even more simple.
The forensic Accountant is a bloodhound of Bookkeeping. These bloodhounds sniff out fraud
and criminal transactions in bank, corporate entity or from any other organization’s financial
records. They hound for the conclusive evidences. External Auditors find out the deliberate
misstatements only but the Forensic Accountants find out the misstatements deliberately.
External auditors look at the numbers but the forensic auditors look beyond the numbers.
Earlier, we were of the belief that detection and prevention of frauds
or white-collar crimes is a part of conventional accounting function.
But the recognition of Forensic Accounting has changed this notion
of ours that “Auditor is a watchdog and not a bloodhound”. They
only check for the compliance of a company’s books to GAAPs,
auditing standards and company policies. Hence, the need for a
bloodhound was apprehended. Like, a bloodhound, they are to sniff
out fraud, criminal transactions out of the financial records out of the
financial records of corporate entities, banks or any other organisation.
Thus, a forensic accountant is a financial detective with a suspicious mind
who can pull out the latent truth and assist in dispute resolution.
Forensic accountant takes a more proactive, skeptical approach in examining the books of
Accounting. They make no assumption of management integrity (if they can assume so then
there is no need for their appointment) show less concerns for the arithmetical accuracy have
nothing to do with the Accounting or Assurance standards but are keen in exposing any
possibility of fraud.
Earlier, we were of the belief that detection and prevention of frauds or white-collar
crimes is a part of conventional accounting function. But the recognition of Forensic Accounting
has changed this notion of ours that “Auditor is a watchdog and not a bloodhound”. They only
check for the compliance of a company’s books to GAAPs, auditing standards and company
policies. Hence, the need for a bloodhound was apprehended. Like, a bloodhound, they are to
sniff out fraud, criminal transactions out of the financial records of corporate entities, banks or
any other organisation. Thus, a forensic accountant is a financial detective with a suspicious
mind who can pull out the latent truth and assist in dispute resolution. His duty is to analyse,
interpret, and summarise complex financial and business related issues. They are to look beyond
the numbers and concentrate on substance over form. This new and groundbreaking accounting
has two main spheres:
(i) Litigation support and investigation (ii) Dispute resolution.
The former represents factual representation of economic issues encompassing existing
litigation. If the dispute reaches the courtroom, he may testify as an expert witness. Whereas in
latter case, he quantifies the damages sustained by parties involved in legal disputes and can
assist in resolving disputes, even before those reach the courtroom. A Forensic Accountant is
supposed to have a three fold approach:
(a) Base layer – Accounting knowledge
(b) Middle layer- Knowledge of auditing, internal controls, risk assessment and fraud
detection
(c) Top layer- Knowledge of thelegal environment and strong communication skills.
The traits of the forensic Accountants could be compared to well bake Pizza. The base of
forensic accounting is Accounting knowledge. Size and the extent of baking decide the quality of
the Pizza. A middle layer is a dispersed knowledge of auditing, internal controls, risk assessment
and fraud detection. It is like the spread of the cheese in Pizza. The toppings of this Pizza are a
basic understanding of the legal environment. The legal environment is essential in order to
support the litigations. The Cherry on the toppings of the pizza is a strong set of communication
skills, both written and oral. It is just the beautification part. Perfect combination of the Pizza
base, Cheese spread and good toppings makes the pizza delicious and the Forensic Auditor the
perfect. It’s a combination that will be in demand for as long as human nature exists.
A well- equipped forensic accountant can provide the following services:
1. Investigate the financial evidence.
2. Analysis and presentation of the financial evidence in a computerised form.
3. Communicate their findings in the form of reports, exhibits and collection of documents.
4. Assist in legal proceedings, including testifying in court as an expert witness and preparing
visual aids to support trial evidence.
These services of forensic accountants can be utilised in various fields. The sphere of
their activities is quite large. They take up various types of assignments. While they can be of
help in business related fraud investigation, they can also handle matrimonial dispute cases. A
list of such cases taken up by a Forensic Accountant is given below.
Criminal Investigations: A Forensic Accountant is normally called for in case of a criminal
investigation, if it entails financial and other related frauds. The Investigative Agencies (EOW,
CID, SFIO, etc), regulatory bodies (SEBI, TRAI, etc) and other stake-holders seek for these
services from them as and when required.
Stakeholders and ownership disputes: These assignments often involve a detailed analysis of
financial records over a period for quantifying the issues in a dispute. For example, amount
payable to a deceased partner or legal heirs of a deceased partner.
Insurance and other related claims: Insurance policies differ significantly as to their terms and
conditions. Accordingly, these assignments involve an in-depth review of the policy to
investigate coverage issues and the appropriate method of quantifying the economic losses
resulting from an event. These assignments demand great knowledge of the forensic accountant
in the local laws and regulations in place. For example, motor accidents, loss on account of fire,
natural calamities, business discontinuance, etc.
Business related Fraud investigation: Business investigations involve asset identification and
recovery, tracing funds, forensic intelligence gathering and due diligence reviews. These
investigations are carried out with the objective of determining the existence, nature, and extent
of fraud and may concern the identification of perpetrator. These investigations often involve
interviews of personnel who had access to the funds and a detailed review of the documentary
evidence.
Dispute settlement: Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trade marks cases,
liability arising from breach of contracts and so on.
Matrimonial dispute cases: Forensic accountants entertain cases pertaining to matrimonial
disputes wherein their role is merely confined to tracing, locating and evaluating any form of
asset involved.
Thus, we see how forensic accountants help the organizations or individuals and society at large.
They are an indispensable part of today’s legal team.
Forensic Accounting in India
India’s economy has been rising for the past few years. But this rise is accompanied by
some evils as well. India has also been experiencing white-collar crimes and scams for the past
few years. Thus, the need of forensic accountants was realised. Forensic accountants played a
major role in letting the cat out of the bag in the 2008 Satyam scam. Of late, the CWG and 2G
scams are in the limelight in India. They are having a major role in these scams as well. While
Forensic Accounting developed as early as 1995 in USA, it put it first step in India just few years
back. Forensic Research Foundation has been established in India for the investigation of fraud.
Another international investigation organisation has also put its feet on the Indian land. Serious
Fraud Investigation Office (SFIO) is another noteworthy organization set up in India for serving
the same purpose. We are looking forward to Forensic Accounting gaining a great momentum in
India. We have a great expectation from ICAI in this respect. We expect that in near future an
accounting standard will be formulated on Forensic Accounting. This will strengthen the walk of
Forensic Accounting from infancy to maturity. This new weapon of Forensic Accounting will be
an immense help to law enforcement agencies and regulatory bodies in curbing white-collar
crimes and scams.
The growing number of regulator and the administrative agencies will demand the
services in the nature of forensic practice. Chartered Accountants are going to find themselves
more involved in what is essentially a type of forensic practice. The changing nature of the
Accounting and Auditing & assurance standards also confirms this.
Nearly 40 percent of the top 100 American accounting firms are expanding their
forensics and fraud services, according to Accounting Today. If this data is of some sense to
Indian scenario then the day is not far away when forensic practice will contribute maximum to
the total revenue of the Indian CA firm. Far from the humdrum stereotypic accountant your mind
might have initially conjured, the forensic accounting professional is more of a private
investigator with a financial sixth sense than the bookkeeper with a green eyeshade.
References
1. Dr. G S Mehta and Tarun Mathur (2007):Preventing Financial Fraud through ForensicAccounting. The Chartered Accountant.
2. Wikipedia, the free encyclopedia
3. Journal of Forensic Accounting: Editor-In Chief: Crumbley D. Larry, Publisher: Inc.Edwards. R.T.
4. Journal of The Chartered Accountant 2007,Pages: 1000-1010.Dr. Madan Bhasin
5. www.forensicaccounting.com
6. www.indiaforensic.com
7. www.ezinearticles.com
